Sunday, August 26, 2007

Should I Create a New Business, Buy an Existing One or Buy a Franchise?

Last time in our "How to Start Your Own Fashion Business Series,"we talked about the idea of being an entrepreneur and starting your own fashion business. I also gave you an assignment. Specifically, you were to: 1) determine if and why you wanted a fashion business; 2) determine what kind of fashion business you wanted; and 3) assess your strength and weaknesses in relation to the business you chose. I trust you completed your assignment. Today, we address an aspect of starting your own business that people do not really think about. For the most part, at this junction, most want to run off to start writing the business plan. That is something you have to do and we will address in detail in our ongoing fashion business series. For the moment, it helps for you to consider whether you want to create your own business from scratch, buy an existing one or buy a franchise. There are advantages and disadvantages to each option. Let’s address each and equip you with some information for you to make an informed decision.Advantages and Disadvantages of Starting you Own Business From Scratch.I will use Ladybrille as an illustration. I love projects where I work from ground up. The Ladybrille name is unique, the concept is fresh, I don’t have to worry about liabilities, creditors or other debts incurred on behalf of the business because I have none. I get to figure out my own rules and regulations and what direction I want the brand to go etc.

Disadvantages. Since I am starting from scratch, I have had to draw up a business plan, register the business, get a fictitious business name license, trademark it, choose a legal structure, draw up and write contracts for third parties that help me execute my vision i.e. website builders, grow the customer/reader base and so much more. What about you? Do you like to work from ground up? Are the concepts you have for your business unique where no one has done it before? Even if you have many doing the same thing, do you have something that sets you apart from your competitors? If the answers are yes to the above questions, then you should most likely consider starting your business from scratch.

Advantages and Disadvantages of Buying an Existing Business.

Advantages: An option you might want to consider is to buy an existing business. The business has already been established and has fulfilled all of the preliminary steps I mentioned above. It, most likely, has a customer base that will remain loyal to you if you do your research and respond to their needs and desires.

Disadvantages:The monies to buy an existing business with is usually a problem. Also, you might end up buying a business with debts and liabilities to last a lifetime, with no way out of the mess. A caveat here, DO NOT let impulse and excitement guide your decision. Do your homework to see if it is worth the investment. Otherwise, it is like trying to flip a house you purchased for real cheap only to find out that you have lots of work to put into it and the expenses you put into fixing the house so you can sell it, far exceeds the purchase price. Not worth it!

Similarly, when you buy a business, ask some of these questions and more and be sure to request actual documentation. Hint, if the buyer says, “don’t you believe me?” Move on to the next buyer. Ask about the business assets, liabilities, and creditors. Research and ask how the business was managed, how many prior owners before the current one who seeks to sell it to you? What is the reputation of the business? Does the location generate traffic i.e. is it prime location with other fashion boutiques like a galleria, mall or plaza? Do your research. Who are the target audience of the business? What are you purchasing? What is the value of the business? Ask the tough questions and do not bat an eye. I will also add that you get an appraisal on the business just like you would if you were buying a home.

Advantages and Disadvantages of Buying a Franchise

Advantages:Usually when we talk about franchises, most think food franchises such as McDonald or Subway. But, fashion/entertainment franchises also exist and are making millions from their loyal customers, readers and viewers. “American Idols,” “Deal or No Deal,” “The Apprentice,” “Big Brother” and “America’s Next Top Model” are sample fashion/entertainment franchises that are successful and are expanding across Africa and raking in millions. To make sure we are on the same page, click here for Wikepedia’s definition of a franchise. I think it works for our purposes.

To better understand franchise and purchasing one, I will use a popular franchise, America’s Next Top Model [ANTM], as an illustration. There are 31 ANTM franchises across the globe. For our purposes, Ghana's Next Top Model [GNTM] was the first country in Africa to purchase an ANTM franchise. What this means is that Tyra Banks and her company Bankable Productions licensed [gave limited permission] to the 702 Ltd. Productions [producer of GNTM] to use ANTM’s trade name, trademarks, reputation and overall stylistic way of doing business. If they negotiated well, probability is that 702 Ltd has an exlcusive license for GNTM in Ghana.

That means no one else can have a GNTM in Ghana. The benefits for GNTM is that the ANTM name is established, ANTM's trademarks, reputation and so forth will help GNTM realize some profits. Like buying an existing business, 702 Ltd need not worry about doing things from scratch. Also, with a franchise, ANTM most likely would train as well as provide GNTM with some of the basic equipment for its operations of GNTM to fit ANTM's standard formula.

Disadvantages: First, GNTM, for example, can not guarantee that it will make a profit. ANTM is successful in America but can it be successful in Ghana even with having a name like Tyra affiliated with it? Second, for most, the capital to purchase a franchise which usually requires high start up costs is simply not available.Third, even if you have the money to purchase, if you do not negotiate wisely you might find that all you got was a non-exclusive license which means another person can open up a fashion business under the umbrella of the franchisor right around the corner from you effectively making you lose your customers. Fourth, the balance of power is not even.

For the most part, the Fanchisor has the say so. That and other things such as required reporting practices, royalty fees, lack of flexibility to incorporate different styles or concept distinct from the standardized franchisor formula negate buying a franchise. Also, back to the GNTM example, if trouble comes knocking,for example, GNTM not ANTM would be the one to carry the weight of any and all liabilities or problems as a result of its business operations.

Your Assignment: Figure out if you want to create your own new business from scratch, buy an existing business or a franchise. The resources below should help you make an informed decision. Until next time, have a brilliant day!